Austerity is stillborn

Yesterday, Chancellor of the Exchequer Philip Hammond delivered his first major fiscal presentation to parliament. Overall it was a somewhat underwhelming event, opting as he did for a 'steady as she goes' approach, rather than seizing the opportunities afforded to him by the referendum result. Nevertheless there were a few key areas that stood out.

Firstly, as has been leapt upon by some Remainers, are the OBR projections that the economy will be £122bn worse off compared to George Osborne's projections in March. They claim that this is proof of the damage the Brexit vote has done to the economy, but fail to take into account several factors. To begin with, the OBR attribute less than half of that extra borrowing, £58.7bn, directly to Brexit. But in doing so, the OBR have had to make several assumptions, namely that Brexit will lead to increased barriers to trade, lower productivity, and lower investment.

It's difficult to blame the OBR for making such assumptions, given the Government are still coming to grips with Brexit and formulating a plan for our withdrawal, but nevertheless, these are incredibly pessimistic assumptions based on a rough hard Brexit scenario. As this blog has argued repeatedly, such a scenario would be madness and is thus very unlikely to happen. Despite the panic induced by May's speech at the Tory party conference, there have been no indicators to suggest the government intends to press ahead with a hard Brexit.

Those assumptions were based on May's stated desire to limit immigration, and jumping to the wholly false conclusion that this cannot be achieved if the UK remains a member of the EEA. What's more, we're increasingly hearing reports of an interim deal, which would see the UK remain in the single market in the short to medium term. Given this, the barriers to trade the OBR assumes in it's forecasts will fail to materialise and thus investment and productivity will be unlikely to fall too. In fact, given the safeguarding of our single market participation, coupled with the opportunities Brexit will afford us globally, there is the distinct possibility of these increasing, rather than falling.

Even taking the OBR forecasts as read, they are still predicting economic growth, from 1.4% next year rising every year to 2.1% in 2020. This is hardly catastrophic and still a far cry from the 'instant recession' proclaimed prior to the referendum result. Most leavers acknowledged there may be a short term economic impact of leaving the EU. These projections show that, and also demonstrate that growth will return to normal after a couple of years. By then we'll be wondering what all the fuss was about.

The biggest takeaway from the chancellor's autumn statement though is that austerity has been stillborn. George Osborne painted himself as the man taking the tough decisions to get the country's finances back on track, yet his cuts amounted to just 0.2%, the national debt now stands at £1.7 trillion and he missed every single deficit reduction target.

Far from correcting this, Hammond has abandoned his predecessor's tentative plans to balance the books, announcing more spending and more borrowing. The jump will see the UK borrow £68bn in 2016/17, then £59bn, £46.5bn, £21.9bn, £20.7bn, and £17.2bn, with government spending representing, a still far too high, 40% of GDP. Moreover, the national debt will break an eye-watering 90% of GDP next year.

The chancellor needed to be far bolder in his approach to a post-Brexit UK. His abandonment of fiscal prudency means that we will run a current account deficit for 22 consecutive years, and will still be living beyond our means 13 years after the financial crash. This saddles future generations with higher debt and higher taxes.

His top down approach to dealing with economic uncertainty is a risky business. It would have been far better to implement tax cuts, rather than spending rises, to boost productivity. The continued freeze in fuel duty was welcome, as was going ahead with the reduction in corporation tax. But there was still a missed opportunity. A further reduction in corporation tax would send the message that the UK is truly open for business, and would help ease the inevitable uncertainty around Article 50 negotiations.

Similarly, the chancellor has taken the wrong approach to the nation's housing problem. Abolishing stamp duty, liberalising planning laws, and reclassifying small sections of the greenbelt would do far more to help those struggling to get onto the property ladder than his announced spending plans. As Hinkley Point and HS2 demonstrate, the Government is woeful at picking projects with decent benefit to cost ratios. Far better to make it easier for the private sector to invest that money where it would be more effective.

All in all, the Brexit costs are at worst, in line with what some Leavers said before the referendum, and still nowhere near the catastrophe predicted by Remainers. But the big take away is that between a far left Labour party and a Conservative party apparently fully wedded to Gordon Brown style 'investment', those voters who want simplified, low taxes, a vast reduction in state spending, and a fiscally prudent government, currently have nowhere to turn.

Why Vote Leave - Part 7: Costs

In the run up to the referendum I intend to post a blog each Sunday detailing the reasons why Britain will be better off outside the European Union. These posts will cover the following topics: the economy, influence, democracy, security, the environment, cost, and reform.

One of the most prevalent issues pertaining to the UK's membership of the EU is the cost of that membership and whether or not it represents good value for money. This debate has been muddied exponentially between the various use of gross and net figures, the amount of EU expenditure in the UK, the fact that as a net contributor we fund that expenditure, the cost of regulation, what's seen as EU waste and so on. It's difficult therefore to cut through the hyperbole and come to a conclusion as to whether the vast sums we send each year to Brussels constitute value for money.

Let's start with UK budgetary contributions. Vote Leave's headline grabbing figure of £350 million a week is only partially accurate. It is based off of the UK's gross contribution to the EU budget which, last year, was £17,8 billion. However, this does not take into account the UK's rebate, worth £4.9 billion last year, or public sector receipts worth a further £4.4 billion. So the actual cost of UK membership in 2015 was £8.5 billion. This itself is no small sum, but it's indicative of Vote Leave's incompetence that they opted for the gross figure, leaving themselves open to accusations of being misleading, rather than the net figure which few would argue was inconsequential. The UK's net contribution to the EU budget for the period of 2009 to 2014, taking into account rebates and receipts, was £48.6 billion.

So whilst Vote Leave's figure is somewhat misleading, there's no denying that we are a substantial contributor to the EU budget.

Now, opponents of the Norway option claim that despite not being in the EU, Norway still pays around the same for access to the single market. This is just as inaccurate as Vote Leave's £350 million claim, if not more so. Norway's expenditure relating to the EEA consists of several factors. Firstly there is the 'Norway Grants', aid paid by Norway as a form economic rehabilitation of post-Communist countries. These amounted to around €804 million from 2009 to 2014. Most importantly, this money is not paid to the EU.

There are also EEA grants, for which Norway provides 95% of the funding. This brings the total to €1.8 billion for that 5 year period. EFTA contribution to EU programmes affecting the EEA amounted to €1.7 billion, with Norway providing roughly 96% of the cost. Norway also participates in several EU programmes, including Horizon 2020 and the Erasmus research programmes, as well as participating in 26 EU agencies, relating to health, research, and eduction amongst others.

Norway's contributions are the price paid for a service, and funding is not one way. Norway's net contribution over the period was €620 million, or €90 million per year. Applying this on a pro-rata basis to the UK upon rejoining the EFTA, we would contribute approximately €2.5 billion a year. A large part of this would be for continued participation in many of the same programmes and agencies that we currently enjoy. Finally Norway pays roughly £7 million a year towards the EFTA budget. The UK's contribution in total then, on a pro-rata basis, would be roughly £2.36 billion a year. A saving of nearly £6 billion a year on our current contributions. So whilst being a member of the EEA does involve costs, it still represents a potential 75% haircut on our current financial obligations. Especially with news today that the EU could well be looking to increase our contributions after a Remain vote.

But it's not just the UK's contributions to consider when evaluating how the EU handles it's finances. The EU itself is extremely wasteful, and incredibly opaque when it comes to it's expenditure. Take for example MEP's expenses. European Parliament members can garner huge sums, tax free and without proper scrutiny, on top of their £60k salary in the form of grants and allowances. This doesn't even take into consideration the amount that can be claimed in expenses.

Then there's the travelling circus that once month sees the European Parliament decamp from Brussels to Strasbourg at a cost of around £130 million. This includes loading 5 trucks up full of plastic trunks, that once contained files and papers, but have now been rendered obsolete by email and the internet. It's a perfect example of the EU's general inertia and reluctance to reform it's procedures.

So not only will leaving the EU mean we will pay significantly less for market access, whilst still having - arguably a larger - say over the rules, it will also mean that we can spend money much more wisely, giving greater value to taxpayers.